Is Harmonic Drive Systems (TSE:6324) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Harmonic Drive Systems Inc. (TSE:6324) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Harmonic Drive Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that Harmonic Drive Systems had JP¥13.1b of debt in June 2025, down from JP¥17.8b, one year before. But it also has JP¥21.0b in cash to offset that, meaning it has JP¥7.82b net cash.

How Healthy Is Harmonic Drive Systems' Balance Sheet?

The latest balance sheet data shows that Harmonic Drive Systems had liabilities of JP¥11.5b due within a year, and liabilities of JP¥20.2b falling due after that. Offsetting these obligations, it had cash of JP¥21.0b as well as receivables valued at JP¥12.1b due within 12 months. So it can boast JP¥1.35b more liquid assets than total liabilities.

Having regard to Harmonic Drive Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the JP¥269.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Harmonic Drive Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Harmonic Drive Systems

It was also good to see that despite losing money on the EBIT line last year, Harmonic Drive Systems turned things around in the last 12 months, delivering and EBIT of JP¥368m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Harmonic Drive Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Harmonic Drive Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Harmonic Drive Systems actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Harmonic Drive Systems has net cash of JP¥7.82b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of JP¥2.2b, being 593% of its EBIT. So is Harmonic Drive Systems's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Harmonic Drive Systems (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.